BoJ Disappoints

By a majority of 7 to 2, including the Governor Mr Shirakawa, the BoJ voted to raise the inflation target to 2.0% “at the earliest possible time”. However, the BoJ’s inflation forecast released today suggests that inflation will rise to +0.9% in the fiscal year ending March 2015, only slightly higher than the previous forecast of +0.8%, which certainly leads me to ask how you define “the earliest possible time”. The BoJ also intends to start a Yen 13 Tr per month asset purchase programme, starting in January 2014 and only once the current Yen 101 Tr programme comes to an end. The BoJ, at that time intends to continue to buy bonds at that rate until a 2.0% target is reached. However, the prospective bond purchases will be mainly short term bills, which will reduce the effective size of the programme due to maturing bills, which were bought by the BoJ as part of their previous programme.

Why delay to January 2014? It seems that Governor Shirakawa has not been quite as compliant as was expected. The joint statement by the BoJ and the government pledged that both parties would strengthen their policy coordination. I have to say, today’s announcement was far less than expected. The Yen initially weakened, though has recovered materially and is currently higher at Yen 88.79 to the US$, around 100 pips stronger than prior to the announcement. Todays statement suggests to me that the PM, Mr Abe will have to get the BoJ to move further and faster, once Mr Shirakawa resigns in April this year, as do 2 of his deputies in March, if he is to achieve his objectives. The Nikkei which was trading higher around the time of the announcement turned and closed lower – personally, I would expect it to decline further, given, as I see it, a disappointing statement;

The new Japanese Finance Minister stated that he would not seek to change the BoJ law. He added that the budget for the next fiscal year (starting April 2013) would be tighter. Furthermore, he proposes to stick to the previous guideline of reducing new bond issuance to under Yen 44tr. Does that mean less fiscal stimulus (possibly even tightening), with monetary easing (modest at best) postponed till January 2014 – sure does to little old me. The Japanese PM stated that a government panel had reported that it was important that the the primary budget deficit be reduced by half in the 2015 fiscal year and a surplus by 2020. That’s not going to get the Yen lower and/or increase inflation !!!!, or for that matter create growth. This is mind boggling stuff and nowhere near what was expected, based on the previous comments by the Japanese government;

The PBoC stated last week that it would start daily short-term liquidity operations. This policy will result in less spikes in short-term interest rates and may indeed reduce the level of interest rates as well;

The FT reports that China’s working age population declined in 2012, a trend which is expected to continue for the next 2 decades. The population between 15 and 59 was 937.3mn in 2012, a decline of 3.45 mn from 2011, according to statistics released by the Chinese National Bureau of Statistics. The rate of decline is expected to increase materially in coming years. Generally, a country’s population declines as a country gets wealthier, but China’s one child policy (started in 1979) has a lot to do with this decline. Previously, analysts, including myself, had expected that the working age population would start to decline in 2015. China will have to rebalance even more so than at present. Can it – I have my serious doubts. The decline in the working population will reduce GDP, though will also reduce the need to seek 7% to 8% GDP growth to ensure that unemployment (and therefore social instability) does not become a problem.Personally, I believe that Chinese GDP will slow to 4% to 5% over the next few years with the danger of even lower growth. I am short term bullish, though medium to long term bearish on China – the impending change in leadership suggests that the Chinese authorities will try to keep matters in hand for the next few months at least. However, the big question is what happens next. I will be particularly vigilant as to Chinese government policies;

The Indian Finance Minister Mr Chidambaram repeated his pledge to reign in the budget deficit, with measures to be announced in next month’s budget. He added that he would introduce a goods and services tax (VAT), to widen the tax base and increase revenue. He repeated that the budget deficit for the fiscal year ending March 2014 would come in at 4.8% of GDP and no more than 5.3% this fiscal year – both big asks, in my view. The RBI is likely to cut interest rates at its next meeting on the 29th January. Credit ratings agencies have threatened to downgrade India to junk, unless the government acts;

Israeli PM Mr Netanyahu is expected to be reappointed PM in Israel. Relations between Mr Netanyahu and President Obama are and will remain strained;

Here we go again. The IMF reports that Greece needs a further E5.5bn to E9.5 bn in 2015/6, though Greece is funded till 2014. Experience has taught all of us that these numbers will be revised higher. Furthermore, the IMF recommend that interest on bilateral loans between EZ countries and Greece be cut to zero and that debt relief and continued aid was crucial. They added that a reduction in interest rates on EFSF loans would also be necessary.
The Troika (EZ, ECB and IMF) will not impose any additional austerity measures on Greece for the next 6 months, to give time to implement the policies currently agreed – which they expect Greece to implement – yeah right. Personally, I believe that this is yet another policy initiative by Germany/Mrs Merkel, in particular, to try and avoid further civil strife/social disorder/problems in the peripheral EZ countries prior to her general election in September. Furthermore, I would not be surprised if the EZ introduces some modest growth measures over the next few months. After all, the German economy is beginning to get affected – not good ahead of an election, though German growth will come through. Clearly, Mrs Merkel will not want her paw prints on such policies ahead of her elections, though if by some mysterious reason they pop up, well its the EZ/ECB. Pretty basic games, but hey that’s how the EZ works.
The EZ stated that the next tranche of aid for Greece, would be approved;

The prospective bailout of Cyprus has been delayed for 2 months – until after the elections in February, at which time the current President is expected to be replaced. Ignore the official reasons, the reality is that the EZ and Germany in particular, are not prepared to deal with the current Communist President, Mr Christofias. The elections are likely to see his removal. Interesting times, using economic/financial power to change administrations – in this case totally justified (as it was with Mr Berlusconi) but…..
Germany, rightly is concerned about tax evasion/money laundering by Russians, who have used Cyprus for such purposes for some time now. Russia will have to cough up – its going to be interesting to see how Mr Putin explains that to his public. In addition, the IMF is seeking a debt haircut, prior to a bailout – the opposite of the official line from the EZ. Once again its going to be interesting as markets could view Cyprus as a precedent for other indebted EZ countries and their banks, if the IMF position (supported by Germany and Finland) force bank bondholders (unlikely to include depositors) and sovereign debt holders to accept haircuts. If that’s the case, what about Spain

Now I’m in trouble – Mr Jeroen Dijsselbloem (age 46), the Dutch finance minister (for just 6 weeks) has been appointed head of the Eurogroup. If someone can tell me how to pronounce that name, I will be most grateful. Mr D, according to Reuters, was a radical leftist in the 2000’s and is considered to be both determined and conciliatory. Hmmmm. He has specialised in agriculture and education in the past – essentially a social policy person – great qualifications for a finance person !!!. Mr Schaeuble, who wanted the job, could not get the support of other EZ countries. However, the German’s were determined that a person from a AAA rated country (though for how much longer) be appointed to replace the ghastly Juncker. Glad he’s gone. The Dutch normally are practical and pragmatic people. Time will tell how Mr D gets on;

The EZ finance ministers meeting, chaired by the Dutchman Mr D (will have to call him Mr D, as i will spell it wrong otherwise), failed to address the issue of using funding from the ESM to recap EZ banks directly rather than through the relevant government. Germany, Finland, Austria etc suggested that such measures would have to wait until the ECB becomes the formal regulator in 2014. Bad news for the Irish in particular, though no surprise;

Mrs Merkel’s party narrowly lost the regional elections in Lower Saxony last weekend, with the opposition SPD/Green coalition the winners by 1 seat. The CDU attracted the most votes – around 36%, with the SPD at 32.6%. Mrs Merkel’s coalition partner, the FDP, did much better than expected, polling around 9.0% of the votes. However, the much increased support for the FPD was probably due to tactical voting by CDU supporters, who did not want the FDP’s vote fall below 5.0% threshold (which would have barred them from representation at the State Legislature) and which was the real danger. Support for the Greens shot up to 13.7%, from just 8.0% previously, which could well make them the decider as to who gains power in the September general elections.
The biggest concern is that Mrs Merkel’s coalition has now lost her majority in the Upper House, the Bundesrat and could have to compromise to pass legislation. In addition, the opposition controlled Bundesrat could propose legislation. However, with the SPD and the Greens more pro Euro, rather than the more Eurosceptic elements within the FDP and her own party, the results would suggest that Mrs Merkel will back off the policy of austerity measures at all costs. Furthermore, Mrs Merkel does not want problems in the EZ ahead of the general elections in September – a big ask, I must say. The Lower Saxony vote, is the 13th consecutive time Mrs Merkel has lost an regional election. The other issue is whether Mrs Merkel will stick with her FDP partners, heading into the general election. The head of the FPD party resigned. She could switch to the Green party or, indeed, post the elections, decide to form a “grand coalition”, with the SPD. That decision is up in the air for a while. Whilst seemingly unlikely, an CDU/Green coalition is not out of the question. However, Mrs Merkel is expected to return as Chancellor following the September elections – her personal popularity remains high, with her current rating around 65%;

The German ZEW investor confidence index came in at 31.5 for January, much higher than the 6.9 in December and the forecast of 12.0. It was also the highest reading since May 2010. The current situations component rose to 7.1, from 5.7 in December and as compared with 6.2 forecast. The survey suggested that economic conditions for Germany over the next 6 months had improved. Companies may start to reinvest again, advised the ZEW economist. Yesterday, the Bundesbank stated that Germany’s economy was showing signs of recovery and the ZEW economist advises that the Bundesbank may well increase its forecast of German GDP, from the current +0.4% for the current year;

The UK budget deficit widened to Sterling 15.4bn in December (Sterling 15.2bn forecast), higher than the Sterling 14.8bn a year earlier. The data reinforces my view that the UK will lose its AAA rating fairly shortly. Having said that I continue to believe that the UK economy is performing better than the official data and the current weakness of Sterling will reverse over the next few months;

US existing home sales rose by +1.2% to an annual rate of 5.1mn, in December, the highest rate of sales since November 2009. Yet better US housing data again, which should translate into a stronger US economy;


Asian markets closed mainly flat to lower, with European markets lower as well. US futures suggest that the market will open marginally lower.

The Euro is trading at US$1.3342, with the Yen stronger at Yen 88.76

Spot gold is trading at US$1690, with March Brent at US$112.40.

The key remains the baffling statement by the BoJ, given the previous comments by the Japanese government. Mr Hamada, the Japanese PM’s special adviser, stated that the BoJ could have done more – no kidding, they have essentially failed to deliver as proposed by the Japanese government. Rapidly closed my Yen short and actually put on a modest long position.

I remain of the view that markets are overbought, though will hold off selling any more for the moment. The Japanese news is deeply perplexing and potentially equity negative, in my view. The Yen carry trade could well be in question.

Kiron Sarkar

22nd January 2013

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